Friday, December 10, 2010

I basically agree with Ezra Klein's opinion that, liberal conventional wisdom notwithstanding, there's nothing magical about the way Social Security is funded that protects it.

And I disagree with Charles Blahous (and Keith Hennessey) that there's any "phony accounting" or "double counting" involved in the payroll tax holiday along with an equal transfer from general revenues to Social Security. Here's the case for it:

The problem is not with the tax relief but with an accompanying accounting gimmick: as described, the provision would also issue $120 billion in additional debt (from general revenues) to the Social Security Trust Fund – in other words, changing the government’s accounting to make it appear as though the $120 billion had been collected even though it hadn’t.

This is more than a harmless accounting entry; because Social Security spending is statutorily limited to the amount of assets in the Trust Fund, the accounting maneuver increases the government’s spending authority by $120 billion plus interest to be accumulated over decades to come.

This is, inescapably, double-counting. The $120 billion in question would be retained by workers while the government would credit the same money to the Social Security Trust Fund. Decades from now, hundreds of billions in benefit payments would be authorized based on phantom tax revenues that never appeared on the federal ledger.

No, that's not right. The tax revenues involved aren't phantom at all; they're from, as he acknowledges, general revenues. Social Security would lose $120B from smaller direct tax revenues, and get $120B from the rest of the government. Certainly, the rest of the government would have a larger deficit, but no one as far as I know is saying anything different. No double counting. Nothing phony. Less revenue, and a larger deficit.

Indeed, in the rest of his post, after much huffing and puffing, Blahous eventually gets to his real claim (his emphasis):

Let’s make this simple: Social Security benefits are funded by payroll taxes. If we want higher Social Security benefits, then we need to collect more payroll taxes. If we want to relieve payroll taxes, then we can finance less in Social Security benefits. Either policy is a valid choice. What is not valid is to refund the payroll tax while still pretending that we are successfully financing higher future Social Security benefits with money we haven’t collected.

But the claim that "Social Security benefits are funded by payroll taxes isn't some sort of axiomatic, Platonic, ultimate truth; it's just current practice and tradition. Violating that tradition may have political costs; it may, as some argue, threaten Social Security's future (but see also Tim Fernholz for a smart rejoinder); it certainly would cost money out of undedicated revenues, which would mean either other spending cuts, larger revenues, or larger deficits. But it could actually happen. That's what Barack Obama is proposing in the tax deal, and that's no phony accounting.